Japanese small-capOpportunities

In November 2016, Portfolio Manager Chris Kaashoek travelled to the Far East to visit several companies.

Why do team members travel to Japan relatively frequently?

‘As Portfolio Managers we see many opportunities in Japan, mainly because relatively few investors pay any attention to this market. This means there are more opportunities in inefficient markets and we can identify companies that are attractively valued. At the same time, it can be difficult to get to know Japanese companies really well. That is partly due to the distance, but there are also significant cultural differences and of course you have the language barrier. It is precisely for these reasons that we travel to Japan frequently to visit companies. We did indeed go twice in 2016: my colleague Maarten Vankan went in June. We visit companies in which we already invest and are also constantly seeking new investment ideas.’

What do you talk about at the companies you visit?

‘That depends on the individual company. We really spend the entire year in dialogue with those companies in which we invest. Yet it is still handy to discuss the most important and strategic topics in person. As we are more focused on the long term as investors, during our meetings we devote less attention to short-term trends in corporate results.

One topic that is frequently broached in Japan at the moment is the corporate governance code, which describes how companies ought to deal with the interests of all stakeholders, including shareholders. In this context, we talk to companies about, for instance, how they can make the best use of their balance sheets; what do they do with the cashflows the company generates? Can they invest in organic growth, are they planning to make acquisitions or perhaps make payments to shareholders in the shape of dividends or share redemptions? We often see Japanese companies doing very little with the capital they earn. They build up ever more robust balance sheets, but the money in the bank isn’t earning much. At our meetings, we try to make companies more aware of the benefits of an efficient balance sheet, for example. These are very worthwhile conversations.’

“At the same time, it can be difficult to get to know Japanese companies really well. That is partly due to the distance, but there are also significant cultural differences and of course you have the language barrier. It is precisely for these reasons that we travel to Japan frequently to visit companies.”

Chris Kaashoek

Can you name some of the interesting companies you visited?

Fujitec is a manufacturer of lifts and escalators that are chiefly sold in the fast-growing Asian markets. The company occupies a solid market position in Japan and also operates in China. About 60 percent of all the new lifts in the world are installed in China. The revenue model of a lift manufacturer is interesting, because the sale of a lift or escalator is accompanied by a multi-year, profitable maintenance contract. We devoted an investment case to Fujitec in a previous Quarterly.

Taikisha supplies varnish and paint installations to the car industry. There are only two major players in this field in the world: apart from Taikisha, Germany’s Dürr. Both companies are profiting from a large number of installations around the world being in need of replacement, in addition to higher demand for automation and environmentally-friendly applications. Taikisha also supplies air conditioning and industrial extraction installations such as those used in cleanrooms.

Metawater is market leader in engineering and maintenance services in the Japanese water and environmental sector. The company supplies both drinking water and water purification installations. It is in a good position to meet the need in Japan to renovate obsolete installations. The company also aims to grow abroad: acquisitions have been made in Europe and the US.

Disclaimer: This document is prepared by the fund managers of Kempen (Lux) Global Small-cap Fund (‘the Fund’), managed by Kempen Capital Management N.V. (‘KCM’). The Fund currently holds shares in Fujitec and Taikisha. The views expressed in this document may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this document. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments. The information in this document is solely for your information. This document should not be considered to constitute an investment recommendation and it is not intended as an offer or a solicitation to buy or sell any financial instrument mentioned in this document. This document is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The views expressed herein are our current views as of the date appearing on this document. This document has been produced independently of the company and the views contained herein are entirely those of KCM.